Active or passive asset management?

A major advantage of active asset management is that it can generate above-average returns (outperformance relative to the broad market average or index). For example, if the US economy is doing badly and the outlook is also bleak, an ‘active’ asset manager that manages a global portfolio, will typically invest somewhat less in US equities. And if an asset manager finds that certain companies have outstanding earnings prospects, he might add more stocks in those companies to the portfolios he manages. The aim is to achieve higher returns than if an asset manager invests only according to the broad market, for example by following a (benchmark) index.

In passive asset management, the asset manager chooses one or more so called trackers (index funds or ETFs). An index fund is a mutual investment fund that tracks the price development of an index (e.g. a particular stock market) as precisely as possible. Investors can usually enter or exit only once a day, usually at the closing value of the previous trading day. An ETF (exchange traded fund) is similar to this: it also follows an index quite closely. But investors can trade it continuously during the trading day, at the current market price.
There are index funds and ETFs available, connected to practically all major exchanges and indices, such as the Dow Jones Index, the S&P 500 Index, the Dutch AEX Index, all kinds of currencies, commodities, bond and real estate indices, as well as specific geographical and sector indices. Convinced ‘passive’ asset managers combine such trackers in their (multi asset) portfolios.

With passive asset management, the investor knows in advance that an above-average return (outperformance relative to the followed index) is not very likely. The reason being that costs are also involved in maintaining the trackers and these costs are deducted from the returns. So generally speaking, the investment result will be less than the index.
In addition, the low costs and almost exact returns of an index cannot always be expected. Under circumstances, this may differ. For example, if, when the market moves sharply, the tracker manager cannot buy or sell in time, because there is no counterparty in the market willing to do business at that very moment.

Our Asset Management service is characterised by a smart combination of active management and use of both active and passive investment. Indeed, we use an active diversification across asset classes (such as equities, bonds, commodities and real estate) and also an active allocation within them (e.g. the ratio of US and European equities to emerging market equities). But within those subcategories, in addition to individual equities and (actively managed) investment funds, we also use trackers (passive instruments).
However, we deploy these ‘actively’. For instance, to temporarily hold more or less equities versus bonds, increase or reduce positions in emerging market bonds, invest more or less in growth or value equities (two opposite styles of equity investing) or invest more or less in certain geographical regions. By implementing such tactical positions partly through passive instruments, we can enter or exit those positions quickly and efficiently. Moreover, their lower costs benefit the returns of our clients.